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DAVID J. WILLIS ATTORNEY
http://www.LoneStarLandLaw.com
Copyright © 2016. All rights reserved worldwide.

FRAUDULENT TRANSFERS IN TEXAS

By David J. Willis, J.D., LL.M.

Introduction

According to the Texas Uniform Fraudulent Transfer Act (“TUFTA,” contained in chapter 24 of the Business and Commerce Code), a transfer “means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset [tangible or intangible], and includes payment of money, release, lease, and creation of a lien or other encumbrance.” This is an extremely broad definition.

Under what circumstances is a transfer considered fraudulent? The largest percentage of fraudulent transfers are transactions conducted with an affiliated person or entity without payment of reasonably equivalent value in return. According to section 24.004(d), "‘Reasonably equivalent value’ includes without limitation, a transfer or obligation that is within the range of values for which the transferor would have sold the assets in an arm's length transaction.” Combine the definitions of “transfer” and “value” and it is clear that intentionally moving assets out of reach of creditors can indeed be a challenge in the face of this law.

Applicable Law

TUFTA is located in chapter 24 of the Business and Commerce Code. Also relevant is Tax Code section 111.024 dealing with tax liability on the part of recipients of fraudulent transfers, as well as Penal Code section 32.33 (“Hindering Secured Creditors”). Federal bankruptcy law relating to this topic is found at 11 U.S.C. § 548 but will not be discussed, since this book addresses Texas law exclusively.

An action by a creditor under TUFTA must be brought within one to four years, depending on which section of TUFTA is cited as a cause of action by the creditor. See Tex. Bus. & Com. Code § 24.010.

Of particular interest is TUFTA section 24.005(b)(1)-(11) which includes a nonexclusive list of eleven factors that may be used in determining actual fraud: 

  1. the transfer or obligation was to an insider;

  2. the debtor retained possession or control of the property transferred after the transfer;

  3. the transfer or obligation was concealed;

  4. before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

  5. the transfer was of substantially all the debtor's assets;

  6. the debtor absconded;

  7. the debtor removed or concealed assets;

  8. the value of the consideration received by the debtor was not reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

  9. the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

  10. the transfer occurred shortly before or shortly after a substantial debt   was incurred; and

  11. the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

No one of the foregoing factors will determine a court’s decision, but if several of these factors are present in a given case then a finding of fraud is legally supportable. Also, “[a]ctual intent to defraud creditors ordinarily is a fact question. Circumstantial proof may be used to prove fraudulent intent because direct proof is often unavailable. Facts and circumstances that may be considered in determining fraudulent intent include a non-exclusive list of ‘badges of frau’ prescribed by the legislature in §24.005(b)).” Ho v. MacArthur Ranch, LLC, 395 S.W.3d 325, 328-29 (Tex.App.—Dallas 2013, no pet.).

Under TUFTA, the creditor must carry the burden of proving the elements as to each alleged fraudulent transfer by a preponderance of the evidence. Walker v. Anderson, 232 S.W.3d 899, 913 (Tex. App.—Dallas 2007, no pet.).The statute explicitly states the standard a plaintiff must meet:

§ 24.006. TRANSFERS FRAUDULENT AS TO PRESENT CREDITORS

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor because insolvent as a result of the transfer or obligation.

The same standard applies to transfers to insiders. B&CC § 24.006(b).   

What is an asset?   

Under section 24.002(2) of TUFTA the term “asset” does not include property to the extent it is encumbered by a valid lien. However, “the value of property in excess of a valid lien [i.e., the equity] . . . is an ‘asset’ as defined by UFTA. Citizens Nat’l Bank v. NXS Constr., Inc. 387 S.W.3d 74, 82-83 (Tex.App. —Houston [14th Dist.] 2012, no pet.). Nor does “asset” include property to the extent it is generally exempt under nonbankruptcy law (details below) or an interest in property held in tenancy by the entireties to the extent it is not subject to process by a creditor holding a claim against only one tenant, under the law of another jurisdiction.

Assets Exempt under State Law      

The TUFTA definition of “asset” does not include exempt assets under non-bankruptcy law including the Texas homestead laws contained in article XVI, section 50 of the Texas Constitution and in Property Code chapters 41 and 42. However, Property Code section 42.004 provides that a transaction may be set aside if nonexempt assets are used to buy or pay down indebtedness on exempt assets “with the intent to defraud, delay, or hinder” a creditor. This reaches back two years. However, proving such intent (and therefore getting the transfer set aside) can be difficult, particularly if the debtor asserts that the transaction occurred in the ordinary course of business, which is a solid defense in Texas under Property Code section 42.004(c).

Postjudgment Discovery       

Judgments are final after thirty days, after which postjudgment discovery (interrogatories, requests for production, and depositions directed at the defendant by a judgment creditor) are commonly used not only to determine the location and value of the defendant’s assets but also whether or not there is a trail suggesting fraudulent transfers. The scope of this process can be wide indeed, reaching back several years. A debtor can be held in contempt (fine or jail) for failing to provide responses.

Fraudulent Transfers and the IRS

In re Wren Alexander Investments LLC, No. 08-52914-RBK, 2011 WL 671961 (Bankr. W.D. Tex. Feb. 17, 2011), illustrates the difficulty in moving assets beyond the reach of the IRS. In this case, the IRS successfully argued that the taxpayer’s transfer was fraudulent (1) under BOC section 24.006(a) since the taxpayer did not receive reasonably equivalent value in exchange and was insolvent at the time of or became insolvent as a result of the transfer, and (2) under section 24.005(a) since the transfer was made with "actual intent to hinder, delay, or defraud" a creditor, present or future.

Implications for Asset Protection Planning

As noted elsewhere in this book, asset protection strategies fall into two groups: strategies implemented in advance of collection action and suit by a creditor/plaintiff; and strategies that can reasonably be put into effect afterward. After suit is filed, creditors are on the lookout for the movement of assets to defeat their legitimate claims. A Texas defendant may be limited to attempting to convert nonexempt assets into homestead-exempt items (one’s primary residence, cars, etc.), holding cash at home, and prepaying certain key items (taxes, attorney’s fees, and the like which are unlikely to be questioned as fraudulent).


DISCLAIMER

Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes as legislatures meet and important cases are decided. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. Although we will respect your confidentiality, this firm does not represent you unless and until it is retained and agrees in writing to do so.

Copyright © 2016 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.